Karl Marx had it right. At some point, capitalism can destroy itself.
You cannot keep on shifting income from labor to capital without having
an excess capacity and a lack of aggregate demand. That's what has
happened. We thought that markets worked. They're not working. The
individual can be rational. The firm, to survive and thrive, can push
labor costs more and more down, but labor costs are someone else's
income and consumption. That's why it's a self-destructive process.

For several hours on August 12, the Journal website ran the video of the interview as a top story, under the headline, "Roubini: Marx was Right".

Considering that the first edition of Marx's three-volume masterwork Capital appeared in 1867, Roubini's revelation isn't exactly news to
socialist opponents of capitalism. But given the intractable nature of
the current crisis--a deep global recession, a weak recovery in the
traditional core of the system in the US and Europe, and now the
possibility of a lurch into a second recession--mainstream, or
bourgeois, economics has been exposed as ideologically driven and
incapable of offering solutions.

Stimulus spending, championed by liberal followers of the economist
John Maynard Keynes, was in full swing two years ago. It staved off
total economic collapse after the financial crash, but failed to produce
a sustained boom and led to big government budget deficits.

That opened the door to the free-market champions of the so-called
Austrian economic school of Friedrich von Hayek, who argued that
slashing spending was key to an economic revival--only to see such
measures choke off growth in Europe and, more recently, the US.

But in August, stockmarkets gyrated worldwide amid a worsening
European debt crisis, a near-stall in US economic growth and a
slowdown even in China, home of the world's most dynamic big economy.
Suddenly, the ideological crisis that accompanied the 2008 crash was
palpable once more as the world system appeared on the brink of a new
recession.

Roubin, a professor at New York University, made his name--and quite
a bit of money, by telling the unvarnished truth to big capital before
the Wall Street meltdown hit. He's done so once again, this time
referring to Marx for an explanation.

In his interview with the Wall Street Journal, Roubini argued that the US economy is flagging because business is hoarding cash--more than US$2 trillion by one estimate--rather than investing it in factories, new equipment and hiring workers. As he put it:

If you're not hiring workers, there's not enough labor income, enough
consumer confidence, enough consumption, not enough final demand. In the
last two or three years, we've actually had a worsening, because we've
had a massive redistribution of income from labor to capital, from wages
to profits.

That shift has taken place not during the crisis, but during the
recovery, as economist David Rosenberg pointed out earlier this year
when he noted that the "labor share of national income has fallen to its
lower level in modern history", 57.5 per cent in the first quarter of
2011, compared to 59.8 per cent when the recovery began. While that might
seem like a small change, given the $14.66 trillion size of the US
economy, it's huge.

In alluding to this trend, Roubini is apparently referring to Marx's
observation about a central contradiction of capitalism. "The consuming
power of the workers is limited partly by the laws of wages, partly by
the fact that they are used only as long as they can be profitably
employed by the capitalist class", Marx wrote in Capital volume 3. "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses."

It's wrong to assume, Marx contended, that capitalists limit their
investments during a crisis because "the absolute consuming power of
society" has reached its limit. On the contrary, the unemployed want
jobs and workers desire a higher standard of living as the slump wears
on.

But during crises, capitalism can't deliver, even when business has
plenty of capital to invest. That's because capitalists won't put their
money into building factories and offices and hiring workers--as Roubini
pointed out--unless they have a reasonable chance of making a profit.
Otherwise, they sit on their money.

"The capital already invested is then, indeed, idle in large
quantities", Marx explained. "Factories are closed, raw materials
accumulate, finished products flood the market as commodities. Nothing
is more erroneous, therefore, than to blame a scarcity of productive
capital for such a condition."

The result, Marx wrote, was both a "superabundance of productive
capital" and "paralysed consumption"--a fairly accurate description of
recent trends in the US economy.

Why do such capitalist crises come
about?

The bigger questions are these: Why do such capitalist crises come
about at all? And why are some downturns in the economy mild recessions,
while others generate protracted crises, like the Great Depression of
the 1930s or the "depression-with-a-small-d" that's gripped the world
economy since late 2007?

Marx wasn't the first to observe what today's mainstream economists
call the "business cycle"--the economic slumps that take place every few
years. His contribution was to delve into the reasons for that pattern.
He concluded that the internal contradictions of capitalism doomed the
system to periodic, highly destructive crises.

The root of these crises is in the unplanned and competitive nature
of capitalist production. For the capitalist, what matters isn't meeting
social needs, but obtaining the maximum profit. If obtaining profit is
possible from producing a life-saving medical device like a heart
pacemaker, that's fine. But if more money can be made by producing junk
food or nuclear weapons, greater investment flows into those industries
instead.

Meanwhile, competition puts capitalists under constant pressure. They
have to make sure that workers produce goods in as little time as
possible--at what Marx called the "socially necessary labour time"
required to produce a particular commodity. Otherwise, more efficient
capitalists will drive them out of business. Thus capitalists are
constantly compelled to invest in labour-saving machinery to cut
production costs.

That is the secret of capitalist profitability. For example, new
technologies may allow workers to produce enough to cover the costs of
their wages in, say, just three hours, instead of the four needed
previously. The result is an increase in labour time spent working just
for the capitalist--increasing what Marx called "surplus value", which
is the source of profits.

But a portion of surplus value must also be reinvested in the
production process. Refusing to do so is not an option for
capitalists--who live by the rule of eat or be eaten. To the capitalist,
Marx wrote in Capital volume 1, the motto is:

Accumulate, accumulate! That is Moses and the prophets!... save, save,
i.e., reconvert the greatest possible portion of surplus-value, or
surplus-product into capital! Accumulation for accumulation's sake,
production for production's sake: by this formula classical economy [the
original bourgeois economics] expressed the historical mission of the
bourgeoisie, and did not for a single instant deceive itself over the
birth-throes of wealth.

The drive to accumulate is blind and chaotic. As Roubini recognised,
"markets aren't working" because what is rational for an individual
person or corporation--the maximization of profit by pushing down labour
costs--can be irrational for the system as a whole.

During the upswing of the business cycle, the problems are largely
hidden. As long as profits are high and credit is available, companies
can borrow to invest in new production and hire new workers. Pundits
proclaim that recessions are a thing of the past.

But even as production expands, profits are squeezed as new entrants
flood the market. Companies go bust, which hits their banks hard. The
banks, in turn, raise interest rates or simply refuse to lend, which
triggers further bankruptcies. Factory closings and mass layoffs
ensure--and, in the modern era, job cuts hit the public sector as tax
revenues decline.

In the section of Capital volume 3 quoted above, Marx described how the crisis can seem to erupt out of nowhere. Thanks to the extension of credit, he wrote:

[E]very individual industrial manufacturer and merchant gets around the
necessity of keeping a large reserve fund and being dependent upon his
actual returns. On the other hand, the whole process becomes so
complicated, partly by simply manipulating bills of exchange [i.e.,
cheques and promises of future payment], partly by commodity transactions
for the sole purpose of manufacturing bills of exchange, that the
semblance of a very solvent business with a smooth flow of returns can
easily persist even long after returns actually come in only at the
expense partly of swindled money-lenders and partly of swindled
producers. Thus business always appears almost excessively sound right
on the eve of a crash.

Marx's description of how credit could delay, but then exacerbate, a
crash applies to the financial debacle of 2008, which involved no small
amount of the kind of manipulation and swindling Marx saw in his day.
Set aside the toxic alphabet soup of today's financial assets--CDS, CDO
and MBS--and Marx's analysis of the role of bankers sounds familiar: "the entire vast extension of the credit system,
and all credit in general, is exploited by them as their private
capital."

The development of credit, in turn, helps expand capitalist production beyond the capacity of
the market to absorb new commodities: "[B]anking and credit ... become
the most potent means of driving capitalist production beyond its own
limits, and one of the most effective vehicles of crises and swindle."

But Marx also stressed that the credit crunch is actually a symptom of problems in the underlying productive economy. He wrote in Capital volume 2, "[W]hat appears as a crisis on the money-market is in reality an
expression of abnormal conditions in the very process of production and
reproduction."

Debates

There are longstanding debates among Marxist economic theorists about
just how capitalist crises play out in general and their manifestation
in different historical periods.

Marx identified a long-term tendency in the rate of profit to
fall--the result of the constant pressure to invest in technology to
replace workers, who are the source of surplus value. But capitalists
have been able to counteract the falling rate of profit in various
ways--for example, by destroying unprofitable capital through highly
disruptive means, ranging from bankruptcies to wars like the Second
World War, which ultimately was the most important reason the system
finally overcame the Great Depression and was launched into a post-war
boom.

In the 1970s, severe slumps returned to the world system as a revived
Europe and Japan, along with several newly industrialised countries,
emerged as more effective competitors to the US. But the restructuring
of uncompetitive industries, free-market policies and corporate
globalisation opened the way to a new boom in the 1990s, when the US
declared that its "miracle economy" was the model for the world.

Ultimately, however, the economic expansion of the 1990s set the stage for a new crisis--one that Marx would have recognised. In the Communist Manifesto, written in 1847, years before he undertook a systematic study of
the system, Marx and co-author Frederick Engels noted that capitalism's
drive to expand led to crises of overproduction--of too many goods to be
sold at a profit:

In these crises, there breaks out an epidemic that, in all earlier
epochs, would have seemed an absurdity--the epidemic of overproduction.
Society suddenly finds itself put back into a state of momentary
barbarism; it appears as if a famine, a universal war of devastation,
had cut off the supply of every means of subsistence; industry and
commerce seem to be destroyed; and why? Because there is too much
civilization, too much means of subsistence, too much industry, too much
commerce...

And how does the bourgeoisie get over these crises? On the one hand
by enforced destruction of a mass of productive forces; on the other, by
the conquest of new markets, and by the more thorough exploitation of
the old ones. That is to say, by paving the way for more extensive and
more destructive crises, and by diminishing the means whereby crises are
prevented.

That passage still has the ring of truth. It was capitalist
overproduction on a world scale in the 1990s that set the stage for the
1997 East Asian financial crisis and the recession of 2001. But by
dropping interest rates to rock bottom, the Federal Reserve was able to
postpone the real day of reckoning for the US for nearly a decade.
Cheap credit and the housing bubble kept US consumers spending and
the number of Asian factories growing, even if the number of
manufacturing jobs in the US continued to decline during the 2002-2007
expansion.

As we now know, banks were happy to make the loans for mortgages and
then pass them along to Wall Street, which bundled them into securities
that later turned toxic. When even a limited number of sub-prime loans
started to go bad, a credit squeeze quickly destroyed investment banks
Bear Stearns and Lehman Brothers. Nouriel Roubini, who had been warning
about all this for years, was suddenly a business celebrity--and even Karl Marx made the financial press.

The bad debts of that era of casino capitalism continue to weigh down
the world economy. Yesterday's toxic assets held by private banks have
morphed into today's government budget deficits, thanks to the
no-questions-asked, multitrillion-dollar bailouts in the US and
Europe.

And the global crisis of overproduction is still unresolved. In the US, the capacity utilisation rate for total industry was 77.5 per cent in July, some 2.2 percentage points above the rate a year earlier, but 2.9
percentage points below the average for the period between 1972 and
2010. That's unmistakable evidence of a depressed economy--and it's what
Roubini was talking about when he cited "excess capacity" and mentioned
Marx.

With mainstream economists fresh out of ideas about how to overcome
the crisis, perhaps it shouldn't be surprising that Marx made news even
in Rupert Murdoch's Wall Street Journal. But don't hold your breath waiting for a follow-up headline: "Capitalism Isn't Working: Socialism is the Alternative." That part is up to us.